Introduction
In recent years, Portugal has gained recognition as one of the top choices in Europe for engaging in business activities with digital assets. This reputation is not only a result of the government's progressive stance on digital assets but also reflects the country's overall economic and social advancement.
Notably, cryptocurrency regulations in Portugal permits the use of cryptocurrencies, enabling investors to freely purchase, possess and trade them. This indicates that cryptocurrencies are deemed lawful in Portugal and the government acknowledges their potential as a new form of economic business.
Considering the above, both the Bank of Portugal and the Portuguese Securities and Markets Commission (CMVM), serving as, respectively, as the central bank and national competent authority for overseeing credit and payment institutions, and the central securities markets’ regulator, have demonstrated a keen interest in crypto assets. Their focus has been primarily on safeguarding consumers and investors, a commitment evident since the early rise of cryptocurrencies. Issuing numerous public statements, notices and warnings regarding crypto assets, these authorities align with regulatory practices observed across other EU central banks and regulatory bodies such as the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA).
Measures to Combat Money Laundering and Terrorism Financing: Law no 83/2017, of 18 August
1. VASP Registration and Services Specification in Brief
Presently, Portugal lacks specific legislation governing cryptocurrency matters. The definition of virtual asset does not meet the criteria of fiat currency, outlined in the Portuguese Anti-Money Laundering (AML) Law. Cryptocurrencies are not classified as "money," whether physical or represented digitally, nor are they considered "electronic money":
Virtual asset, a digital representation of value that is not necessarily linked to a legally established currency and that does not have the legal status of fiat currency, security or other financial instrument, but that is accepted by natural or legal persons as means of exchange or investment and which can be transferred, stored and traded electronically.
However, the imminent implementation of the Markets in Crypto-Assets Regulation (MiCA) within the EU as of June/December 2024, directly applicable to Portugal as a Member State, is poised to alter this landscape.
Yet, even without considering MiCA, it is inaccurate to depict a regulatory void, as existing laws must be evaluated on a case-by-case basis to ascertain their applicability to particular crypto assets or associated activities. Consequently, the regulatory framework for crypto assets varies widely based on each specific characteristic. Notably, the Portuguese AML Law mandates a registration process for individuals or entities—referred to as Virtual Asset Service Providers (VASPs)—offering designated services to clients involving virtual assets.
Under this law, authorization and registration with the Bank of Portugal are obligatory before commencing activities in Portugal for providers engaged in:
- Exchange services between virtual assets and fiat currencies.
- Exchange services involving one or more forms of virtual assets.
- Services facilitating the transfer of virtual assets between addresses or wallets.
- Custodian wallet services enabling the secure storage and transfer of private cryptographic keys on behalf of customers.
However, this authorization and registration are compulsory only when these services are operated within Portuguese jurisdiction, encompassing:
- Portuguese-incorporated legal entities involved in virtual asset activities.
- Individuals or entities domiciled or established in Portugal engaging in virtual asset activities.
- Individuals or entities compelled to declare their activity's commencement to the Portuguese Tax Authority due to virtual asset activities.
To acquire a VASP license, it's crucial to consider that the Central Bank, as a responsible supervisory authority for registration of VASP´s activities since 1 September, 2020, has released Notice 3/2021 effective from 24 April 2021, which sets out the rules for registering Virtual Asset Service Providers (VASPs) conducting operations within Portugal. This notice stems from the incorporation of EU Directive 2018/843 of 30 May 2018 into Portuguese legislation, specifically within the updated framework of the Portuguese Anti-Money Laundering (AML) system as established by Law no 83/2017 (the recent and updated Law no 99/2021, of 31 December).
2. The Main AML Requirements for VASPs
In compliance with the general Anti-Money Laundering (AML) framework, service providers in Portugal are mandated to adhere to stringent protocols aimed at combating money laundering and the financing of terrorism. These protocols encompass a range of responsibilities, including:
- Monitoring and assessing the risks associated with money laundering and terrorist financing stemming from advancements in technology.
- Conducting thorough due diligence on clients' business operations, whether one-time or ongoing.
- Formulating and implementing robust policies, procedures and controls to effectively manage the risks of money laundering.
- Employing Know Your Customer (KYC) procedures to accurately identify customers and business owners.
- Collecting and securely storing customer relationship information to ensure transparency and accountability.
- Analyzing and scrutinizing transactions based on comprehensive risk assessments to detect suspicious activities.
- Promptly reporting any suspicious transactions to competent authorities and cooperating fully in investigations.
To identify potentially suspicious transactions, service providers utilize a standardized set of indicators, often referred to as "red flags" as recommended by the Financial Action Task Force on Money Laundering (FATF). These indicators encompass various aspects, including transaction-related characteristics such as size, frequency, and nature, as well as anonymity indicators and those related to the origin of funds and geographical risks. Article 43 of Law 83/2017 imposes a duty to report any suspicious transactions to the Central Department of Criminal Investigation and Prosecution and to the Financial Intelligence Unit.
Moreover, certain categories of individuals and entities are deemed to pose a higher risk of engaging in money laundering activities. These include:
- Individuals and organizations operating in offshore jurisdictions.
- Politically exposed persons (PEPs), including their close family members and individuals with significant corporate or commercial ties.
- Individuals and entities listed on sanctions lists
- Persons designated in sectoral regulations that necessitate enhanced precautionary measures.
In addition to the general AML Legal Framework, the Notice 1/2023 of the Bank of Portugal that came into force on 15 July, 2023, complements the AML rules by setting out the procedures and requirements applicable to compliance with the preventive duties against money laundering and terrorist financing within the scope of the activity of entities that carry out activities with virtual assets.
Initial Coin Offerings (ICOs): Tokens and Its Legal Qualification
The CMVM's announcement of July 23, 2018 to entities involved in launching Initial Coin Offerings (ICOs) underscores the critical importance of assessing the legal nature of tokens prior to issuance, particularly regarding their potential qualification as securities. ICOs, aimed at securing financing from the public through token issuance, necessitate a thorough understanding of the regulatory framework, especially if the tokens are deemed securities.
Tokens issued in ICOs may assume the character of atypical securities, subject to specific legal requirements. The determination of whether a token qualifies as a security hinges on a case-by-case examination, considering its nature and complexity.
The CMVM provides some criteria for assessing if tokens are deemed as securities, emphasizing the representation of private and patrimonial legal situations and comparability with typical securities. Additionally, factors indicating an expectation of return for investors, such as the right to income or actions to enhance token value, are t be taken intoconsideration.
Given the evolving nature of token characteristics, the CMVM commits to monitoring developments and practices associated with tokens, which may influence their classification.
For ICOs targeting Portuguese investors where tokens qualify as securities, adherence to national and EU legislation is mandatory. This includes regulations governing issuance, representation, transmission, public offers, market abuse and information quality requirements. It is also crucial to analyze the rules with regard to marketing of financial assets for the purposes of MiFID II. Prospective ICO issuers must also comply with prospectus approval procedures unless qualifying for exemptions.
Entities planning ICOs are advised to liaise with the CMVM to ascertain the legal nature of tokens before proceeding with issuance. Clarity on regulatory obligations and compliance is essential to ensure investor protection and regulatory compliance.
Taxation
The new Portuguese crypto tax regime was approved on 28 November, 2022, and is applicable from 1 January, 2023, onwards.
To navigate the tax terrain concerning cryptocurrencies in Portugal, it's crucial to grasp the diverse categories of crypto income. The Portuguese Personal Income Tax Code (Código do IRS) categorizes crypto income into three primary groups: passive income (Category E), capital gains (Category G), and freelance/self-employment income (Category B).
Compensation received in fiat currency from passive investments in crypto, devoid of any crypto transfer, will be subject to a flat tax rate of 28%. This standard regulation applies when the income doesn't fall under another category. However, it's noteworthy that crypto can still be received as compensation itself (not fiat currency) if it qualifies as salary or self-employment income, and it will be taxed accordingly, typically at progressive tax rates.
Sales of crypto assets held for less than 365 days are categorized as taxable capital gains. Sales of crypto held for over 365 days are reportable but not subject to taxation. These sales will incur a flat tax rate of 28% on the capital gains when exchanged for fiat currency. However, if the income is received by a Portuguese tax resident who chooses to consolidate it, progressive tax rates ranging from 14.5% to 53% will apply. It's important to note that "investment/security tokens" will be treated as securities and taxed accordingly, regardless of the 365-day rule.
Self-employment income encompasses activities related to the issuance of crypto assets, such as mining, or validating crypto transactions through consensus mechanisms, for fiat currency. Within this category, progressive tax rates ranging from 14.5% to 53% will apply. A fixed presumption of expenses of 5% will be applied to income derived from mining operations, with 95% applied to the sale of mined assets. It's crucial to note that ceasing activity as a self-employed individual is deemed equivalent to selling crypto assets.
Additionally, under the self-employment income regulations, taxpayers are legally obligated to issue invoices regarding the income received, which, based on applicable circumstances, may trigger VAT reporting obligations and necessitate registration with the Portuguese Social Security, along with payment of social security contributions (in addition to personal income tax obligations).
The major tax implications involve:
- Crypto-to-crypto transactions excluded in tax regime:
⎼ Non-Fungible Tokens as they are not regarded as crypto assets so there’s a gap.
⎼ Affirmation of FIFO criteria for other accounting purposes.
- Personal Income Tax overview:
⎼ Capital gains: 28% or 0% if asset held for >365 days.
⎼ Capital income: 28% or 0% if asset held for >365 days.
- Corporate Tax overview:
⎼ Taxed under corporate income tax brackets (currently 21% or 17%).
- VASPs:
⎼ Portuguese VASPs need to declare crypto transactions every January from 2024 onwards.
⎼ All European VASPs will have to do the same from 2026 onwards (new DAC8 directive).
- Stamp Duty overview:
⎼ VASPs must impose a 4% tax on the commissions they charge
⎼ Contributions and non-family inheritances are subject to a 10% tax.
- The so-called exit tax:
⎼ In case of losing tax residency, for tax purposes it is considered as a “sell” of the assets.
Next Steps: The CMVM Launches a Public Consultation on the MiCA Regulation
The Portuguese Securities Market Commission (CMVM) has initiated a public consultation dedicated to Regulation (EU) 2023/1114 of the European Parliament and of the Council, dated May 31, 2023, concerning crypto asset markets (MiCA Regulation). The aim of this procedure is to identify stakeholders interested in operating in Portugal under this new regulatory framework, as well as to assess the impact that the introduction of the MiCA Regulation may have in Portugal.
It is worth noting that the authority (or authorities) that will have supervisory powers within the scope of the MiCA Regulation has not yet been designated, and it is expected that this competence will be distributed between the Bank of Portugal and the CMVM. The current public consultation is launched by the CMVM "as the authority potentially receiving supervisory assignments under this regulation, as mentioned in the public consultation document."
This initiative also seeks to assess the impact that the introduction of the MiCA Regulation may have in Portugal through a detailed analysis and to compile information that will assist in the preparation of the regime's implementation, taking into account the specificities and contributions of stakeholders interested in operating in Portugal participating in the procedure.
As a reminder, the MiCA Regulation takes effect from December 30, 2024, with the exception of provisions relating to asset-referenced tokens (ART) and electronic money tokens (EMT), which take effect from June 30.
The public consultation is available online on the official CMVM website. Interested parties have a period of 30 consecutive days, from April 8, 2024, to May 8, 2024, to submit comments and suggestions, with no possibility of extension.
Conclusion
Portugal's progressive approach to cryptocurrency regulation, positions the country as one of the desired destinations for digital assets investment. With an advancing legal framework and government support for fintech development, Portugal offers a compelling proposition for businesses seeking to capitalize on the opportunities presented by the digital economy.
If you would be interested in learning more about Portugal, and how you can play a bigger role in defining the upcoming rules and regulations, we invite you to connect with us and schedule a complimentary consultation.
